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All About Payday Loan Debt

All About Payday Loan Debt

Anyone who has ever stayed up too late watching TV has almost certainly seen ads for payday loans.  The ads promise quick, easy loans, but few people really understand how these loans work.

The History of Payday Loan Debt.

Payday loans grew from a sector of the banking industry known as personal loans.  When a person needed a small loan to cover an unexpected expense, such as a car repair or travel costs for a family emergency, he or she would go to a bank and ask for a loan.  Typically, loans of this nature were only given to people with the highest credit ratings, since there was no asset that acted as collateral for these loans.

Of course, this meant that plenty of people needed loans and were unable to obtain them.  To meet this need, short term loans were offered by pawn shops.  These loans provided people with a small amount of money in exchange for an item with some value. Within a short amount of time, these shops started offering so-called “payday” loans.  Originally, these loans worked by having the borrower sign over their future paycheck to the pawn shop so that they could cash the check at a point in the future.

Today, payday loan debt rarely requires a borrower to put up a future paycheck as collateral, but they still operate as short-term loans.  A borrower agrees to take a small amount of money, then pay the money back (plus a fee for the service) in a week or two.

The Problem with Payday Advances.

The biggest problem with this occurs when a borrower cannot pay back the loan.  In these cases, a new payday loan debt is issued to the borrower, with the fees from the previous loan wrapped up into the new one.  It’s important to note that most payday loan lenders charge the same fee regardless of the amount of the loan.  This means that even if a borrower can pay off part of the balance, he or she will not see a reduction in the fees that are charged.  

After several weeks of this, a payday loan can easily balloon to twice its original size, and most borrowers will still be in a position where they cannot pay them off.  For this reason, many financial advisers and consumer advocated groups have issued multiple warnings about payday loan debt.  Consumers who cannot get them paid off quickly often find themselves paying thousands of dollars, and still having to declare bankruptcy.

About Author: Debt Help Desk

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